One of my favourite passive income ideas is investing in proven blue-chip companies. I can sit back and benefit financially from the success of businesses with some specific competitive advantage that helps them earn money on a big scale.
Unlike some second income ideas, investing in shares does not require a large lump sum of cash upfront. In fact, it is possible to put aside some money on a regular basis and use that to build dividend income over time.
Here is how I could go about that with £20 a day, if I wanted to target monthly passive income of £300 within the next 10 years.
Start with saving
My first move would be to get into the regular habit of saving £20 a day.
That might be easy at first, but when bills pop up then money could be tighter. So I would make this a habit, for example by recording in a ledger each day that I had put aside the money, or setting up a standing order into a share-dealing account or Stocks and Shares ISA.
This £20 a day would soon start to add up. As long as I stuck with the plan, by the end of one year I would already have £7,300 to invest.
All of that money to buy shares, for less each day than the price of a couple of packets of cigarettes (or a round of drinks in many pubs these days)!
Choosing shares to buy
I would use these funds to invest in shares with a very specific objective: generating passive income.
I own shares in what I think are some great companies that do not pay dividends, like Google parent Alphabet, and S4 Capital. With income as my objective, though, such shares would not serve my purposes. I would be looking for companies that can generate sizeable free cash flows and use them to pay dividends.
So I hunt for a business with a large market I see as resilient. That could be anything from selling shampoo to refining oil. I stick to shares in industries I personally understand, as I think that helps me assess their prospects.
I then look for businesses with some unique competitive advantage within such an industry. For example, GSK has patents on medicines while AG Barr alone has the recipe to the Irn-Bru soft drink. Those are unique assets.
Price and yield
A great company only becomes a great investment if I buy at the right price, though.
So I focus on buying into companies only when they trade at an attractive share price.
Price also helps determine the dividend yield I earn. Yield is basically the dividends I expect to receive as passive income annually, expressed as a percentage of my purchase price.
If I invest at an average 5% yield, I should hit my passive income goal in under a decade. If I compound the dividends as I go, meaning that I use them to buy more shares, I could be earning £300 each month on average in dividends even sooner.
The post I’d target monthly passive income of £300 by investing £20 a day appeared first on The Motley Fool UK.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. C Ruane has positions in Alphabet and S4 Capital Plc. The Motley Fool UK has recommended A.g. Barr P.l.c., Alphabet, and GSK. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.